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3-43 A financial advisor has recommended two possible mutual funds for investment: Fund A and Fund B. The return that will be achieved by each of these de- pends on whether the economy is good, fair, or poor. A payoff table has been constructed to illustrate this situation: STATE OF NATURE GOOD FAIR POOR INVESTMENT ECONOMY ECONOMY ECONOMY Fund A $10,000 $2,000 -$5,000 Fund B $6,000 $4,000 Probability 0.2 0.3 0.5 (a) Draw the decision tree to represent this situation. (b) Perform the necessary calculations to determine which of the two mutual funds is better. Which one should you choose to maximize the expected

3-43 A financial advisor has recommended two possible mutual funds for investment: Fund A and Fund B. The return that will be achieved by each of these de- pends on whether the economy is good, fair, or poor. A payoff table has been constructed to illustrate this situation: STATE OF NATURE GOOD FAIR POOR INVESTMENT ECONOMY ECONOMY ECONOMY Fund A $10,000 $2,000 -$5,000 Fund B $6,000 $4,000 Probability 0.2 0.3 0.5 (a) Draw the decision tree to represent this situation. (b) Perform the necessary calculations to determine which of the two mutual funds is better. Which one should you choose to maximize the expected

MATLAB: An Introduction with Applications
MATLAB: An Introduction with Applications
6th Edition
ISBN:9781119256830
Author:Amos Gilat
Publisher:Amos Gilat
Chapter1: Starting With Matlab
Section: Chapter Questions
Problem 1P
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3-43 A financial advisor has recommended two possible mutual funds for investment: Fund A and Fund B. The return that will be achieved by each of these de- pends on whether the economy is good, fair, or poor. A payoff table has been constructed to illustrate this situation: STATE OF NATURE GOOD FAIR POOR INVESTMENT ECONOMY ECONOMY ECONOMY Fund A $10,000 $2,000 -$5,000 Fund B $6,000 $4,000 Probability 0.2 0.3 0.5 (a) Draw the decision tree to represent this situation. (b) Perform the necessary calculations to determine which of the two mutual funds is better. Which one should you choose to maximize the expected value? (c) Suppose there is a question about the return of Fund A in a good economy. It could be higher or lower than $10,000. What value for this would cause a person to be indifferent between Fund A and Fund B (i.e., the EMVS would be the same)?
Transcribed Image Text:3-43 A financial advisor has recommended two possible mutual funds for investment: Fund A and Fund B. The return that will be achieved by each of these de- pends on whether the economy is good, fair, or poor. A payoff table has been constructed to illustrate this situation: STATE OF NATURE GOOD FAIR POOR INVESTMENT ECONOMY ECONOMY ECONOMY Fund A $10,000 $2,000 -$5,000 Fund B $6,000 $4,000 Probability 0.2 0.3 0.5 (a) Draw the decision tree to represent this situation. (b) Perform the necessary calculations to determine which of the two mutual funds is better. Which one should you choose to maximize the expected value? (c) Suppose there is a question about the return of Fund A in a good economy. It could be higher or lower than $10,000. What value for this would cause a person to be indifferent between Fund A and Fund B (i.e., the EMVS would be the same)?
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